(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched., Part I, Cl. (86)‑‑‑C.B.R. Circular No.2 of 1996, dated 18‑2‑1996‑‑‑Exemption‑‑‑Educational institution‑‑‑Payment of salary to teachers related to the Members of the Board of Directors was termed as not for purpose of education but for personal benefit and exemption was disallowed‑‑‑Validity‑‑‑Institution was separate from its administration‑‑‑Method of running the institution had nothing to do with the purpose of its establishment‑‑‑If the Board of Trustees had employed some staff related to them but the .staff was being paid salaries suitable to their qualification and it did not give the impression that the same were disproportionate to their abilities and the work assigned to them that could not be used as a tool to disallow the exemption.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched., Part I, Cl. (86)‑‑‑Exemption‑‑‑Educational insti tution.‑‑Test and points to see for grant of exemption.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched. Part I, Cl. (86)‑‑‑Exemption‑‑‑Educational institution‑‑‑Use of surplus for educational purpose‑‑‑No profit motive‑‑ Where the sole object of an institution was education, and the surplus was used for educational purposes only, no profit motive would come in by the mere presence of the surplus as no prudent institution can work without having some idle funds at its disposal for unforeseen contingencies.

(d) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Second Sched., Part I, Cl. (86)‑‑‑Exemption‑‑‑Educational institution‑‑‑Employees related to Board of Governors or Board of Trustees‑‑‑Surplus used for improvement of institution‑‑‑No bungling in accounts‑‑‑Disallowance of exemption‑‑‑Validity‑‑‑If the purpose was imparting education and the working of the organization had been so proved then some employees being relation of the Board of Governors or Board of Trustees could not be of any damage for the claim of exemption‑‑‑If accounts showed profit it also did not become a disqualification for the claim‑‑‑Requirement of exemption being the purpose i.e. imparting education, if was being fulfilled and thus the exemption could not be denied‑‑‑Exceptions which could be fatal for the claim were bungling in accounts for personal benefits of the sponsor and distribution of profit directly or indirectly‑‑‑If the accounts were prepared as per rules and regulations and there was no reason to believe that some manipulation had been done for transfer of profit for personal gains, exemption could not be denied‑‑‑Keeping the surplus for improvement of the institution was no reason for disallowing the exemption‑‑‑Damage to the claim was personal gains in actuality‑‑‑Salary paid was proportionate to the job and qualifications of the said persons and amount paid looked reasonable which did not give the impression that they were exceptional or excessive‑‑‑Exemption allowed by the First Appellate Authority was fully justified and appeal of the Department was rejected by the Appellate Tribunal.

Mrs. Sabiha Mujahid, D.R. for Appellant.

Noor Muhammad Qureshi for Respondent.

Date of hearing: 10th May, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑The Department assails the order of the CIT(A) through which exemption has been allowed under section 86 to this institute.

The brief facts of the case are that the assessee institute was formed through a Trust Deed registered with Registrar, Joint Stock Companies, Lahore on 17th day of December, 1999. This memorandum as per clause 13(d) describes that the income and property of the institution shall be applied solely towards the promotion of the objects of the association and no portion thereof shall be paid or transferred directly or indirectly by way of individual bonus or otherwise, howsoever, by way of profit or by way of other means to the members of the Board and/or their relations.

The D.R. says that two of the teachers are related to the members of the Board of Directors. This fact alone is enough to indicate that the purpose of the institution is not education but personal benefit. She therefore, challenged the treatment given by First Appellate Authority.

Learned A.R. brought our attention to the order of the CIT and said that the only requirement of clause (86) of the Second Schedule is that the purpose of the institution should be imparting education and it should not be personal profit. The fact that two teachers are related to the Board of Directors does not damage the purpose. He informed that the department has accepted assessee accounts without any qualification or objection. The acceptance of accounts, which is unusual by the department alone is enough to prove that assessee claim is correct. The obvious conclusion which comes from the same is that the main purpose for which the Trust has been created is being achieved in letter and spirit and the surplus fund is not in personal use or benefit of anyone.

We feel ourselves convinced with the arguments of learned AR that the institution is separate from its administration. The method of running the institution has got nothing to do with the purpose of its establishment. If the Board of Trustees have employed some staff related to them but the staff is being paid salaries suitable to their qualification and it does not give the impression that the same are disproportionate to their abilities and the work assigned to them, it cannot be used as a tool to disallow the exemption. In this regard the parameters, which have been fixed by the higher Courts and by the C.B.R. vide its Circular No.2 of 1996, dated 18‑2‑1996 are as follows:‑

"Clause (86) of Part‑I of the Second Schedule to Income Tax Ordinance, 1979 reads as under:‑‑‑

Income of Universities and educational institutions:‑‑

Any income of any University or other educational institution established solely for educational purposes and not for purposes of profit.

2. It has been observed that at times clams of exemption under this clause are rejected on irrelevant grounds e.g. the objections that heavy tuition fees are charged or that salaries paid to staff are excessive. Such a treatment completely ignores the fact that the expenses claimed are vouched and verifiable, that the staff and the institution are two distinct, separate and independent legal entities and that the conditions laid down for an institution to qualify for exemption in the Clause are totally different.

3. The real test to be applied in such cases is to see that the institution has been established solely for educational purposes and not for purposes of profit. In order to ascertain that, it has to be seen that the profits or surplus of the educational institution is not diverted to the personal benefit of the proprietor, sponsor, partner or the directors of the educational institutions. Some of the points to see in this respect are the following:‑‑‑

(a) No dividend or profit, by whatever called, is paid to the investors or the sponsors or any other person having direct or indirect interest or control in the educational institution.

(b) No extraordinary pay, salary or remuneration, by whatever name called, is allowed to any employee or any person, related to those sponsoring or managing the institution or having any interest in the management.

(c) No benefit, whether convertible in cash or otherwise, is provided to any person having a direct or indirect interest in the educational institution.

(d) The profits/surpluses of the educational institution are not invested in the stocks of companies owned or controlled by the management of the institution.

4. It is clarified that while applying the above instructions, facts of individual cases should be examined on year to year basis and findings given accordingly. However, past history should always be kept in view if an institution shows profit for the year under review because declaration of profits for one year does not necessarily mean that it is run for purposes of profit.

5. Where the sole object of an institution is education, and the surplus is used for educational purposes only, no profit motive comes in by the mere presence of the surplus as no prudent institution can work without having some idle funds at its disposal for unforeseen contingencies.

6. The cases of educational institutions claiming exemption under clause (86) may, therefore, be finalized in the light of guidelines given in this circular."

From the above parameters it becomes obvious that it the purpose is imparting education and the working of the organization so proves then some employees being relation of the Board of Governors or Board of Trustees cannot be of any damage for the claim of exemption. It may be worth‑mentioning here that during the working of such an institution if the accounts show profit it also does not become a disqualification for the claim. The requirement of exemption being the purpose i.e., imparting education, if is being fulfilled the exemption cannot be denied. In this regard exceptions which can be fatal for the claim are bungling in accounts for personal benefits of the sponsor and distribution of profit directly or indirectly. If the accounts are prepared as per rules and regulations and there is no reason to believe that some manipulation has been done for transfer of profit for personal gains, exemption cannot be denied. Keeping the surplus for improvement of the Institution is no reason for disallowing the exemption. The circular of C.B.R. mentioned supra is quite exhaustive and is true picture of the requirements of the exemption. The emphasis of the relevant provision and the explanatory circular is on `purpose'. The damage to the claim is personal gains in actuality. In the present case the arguments of the department does not give any such impression. This however shall be determined on case to case basis. Further whether the salary paid is in proportionate to the job and qualifications of the said persons or amount thus paid looks reasonable or fabulous may also be determined in each case separately. In the present case the salary paid to the teachers is as per their qualifications. They are slightly higher than what is being paid in the government sector. However, it does not give the impression that they are exceptional or excessive. In this view of the matter the exemption allowed by the CIT is fully justified and department does not have any case.

The appeal is rejected.

C.M.A./560/Tax (Trib.)Appeal is rejected.